Asset-Backed Securities (ABS) issuance slowed this week. Year-to-date total
US ABS issuance of $17bn (tallied by JPMorgan's Christopher Flanagan) is a
fraction of the $45bn for comparable 2008. There has been no home equity ABS
issuance in months.

Total Commercial Paper outstanding jumped $14.8bn this past week to $1.491
TN. CP has declined $190bn y-t-d (49% annualized) and $342bn over the past
year (18.6%). Asset-backed CP added $2.2bn last week to $702bn, with a 52-wk
drop of $101bn (12.5%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $194bn y-o-y, or 3.0%, to $6.646 TN. Reserves have declined
$300bn over the past 23 weeks.

Global Credit Market Dislocation Watch:

March 25 - Bloomberg (Li Yanping): "China's leaders may press at the Group
of 20 summit for specific steps to protect its more than $1 trillion of dollar
assets as U.S. fiscal policies risk sparking a 'currency war,' a senior Chinese
researcher said. The dollar weakened after the Federal Reserve said March 18
it would buy as much as $300 billion of Treasuries and the U.S. this week outlined
plans to buy as much as $1 trillion of illiquid bank assets. U.S. purchases
of Treasuries are 'irresponsible' because they may weaken the dollar, Li Xiangyang,
of the government- backed Chinese Academy of Social Sciences, told a forum...
'Chinese leaders are likely to articulate their concern to their U.S. counterparts
strongly and ask for specific measures.'"

March 25 - MarketWatch (Chris Oliver): "China's calls for a new international
reserve currency to replace the U.S. dollar are more than mere bluster and
could likely lead the debate over the future of the global foreign-exchange
system, analysts say. 'By proposing such a sweeping reform, China is demonstrating
its growing influence in reshaping the global monetary system, and is now on
offensive in the debate of who is responsible for the global imbalances,' Deutsche
Bank's chief economist for Greater China Jun Ma said... The comments by People's
Bank of China Gov. Zhou Xiaochuan are setting a framework for talks on how
to resolve the huge trade imbalances between China and the U.S., analysts said.
In the past, China has been blamed for its large trade surplus by officials
in the U.S. and elsewhere, who see the yuan as undervalued. 'China has effectively
set the agenda for the G20 leaders' summit,' wrote SocGen economists... referring
to next week's meeting of finance chiefs from the Group of 20 leading economies
in London."

March 27 - Bloomberg (Tony Czuczka): "Swedish Finance Minister Anders Borg
said that the rise in government borrowing during the financial crisis poses
a threat to economic stability and laid the blame at the door of the U.S. and
U.K. Borrowing requirements are reaching levels that are putting economies "in
jeopardy," Borg told an audience at the German Finance Ministry in Berlin today.
He singled out the U.S. and U.K., which he said are shouldering 'humungous
deficits.'"

March 24 - Bloomberg (Tony Czuczka): "President Barack Obama urged fellow
Group of 20 leaders to provide a 'robust and sustained' fiscal stimulus, saying
that 'much more' action is needed to fight the global recession. In an article
published today in newspapers including Germany's Die Welt and the Paris-based
International Herald Tribune, Obama also urged increased funding for international
lenders and a 'common framework' of steps to restore the world economy's flow
of credit."

March 23 - Bloomberg (Rebecca Christie and Robert Schmidt): "The Obama administration
unveiled its plan to remove toxic assets from the books of the nation's banks,
betting that it can revive the U.S. financial system without resorting to outright
nationalization. The plan is aimed at financing as much as $1 trillion in purchases
of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury's
remaining bank-rescue funds. The Public-Private Investment Program will also
rely on Federal Reserve financing and Federal Deposit Insurance Corp. debt
guarantees..."

March 25 - Wall Street Journal (Sudeep Reddy and Michael R. Crittenden): "The
Treasury Department's program to deal with banks' troubled assets leaves as
little as $82 billion in the $700 billion bailout fund approved last fall,
putting the U.S. government's financial-rescue squad in a bind. The remaining
cash will be needed to cover aid to troubled auto makers, potentially tens
of billions of dollars to recapitalize major financial institutions, and any
other unwelcome surprises. But a sharp backlash against bailouts means Congress
is unlikely to mandate more funds anytime soon."

March 24 - Bloomberg (Ari Levy and Daniel Taub): "U.S. banks, battered by
record losses from the worst housing slump since the Great Depression, now
must weather increasing loan delinquencies from owners of skyscrapers and shopping
malls. The country's 10 biggest banks have $327.6 billion in commercial mortgages,
which face a wave of defaults as office vacancies grow and retailers and casinos
go bankrupt."

March 25 - Wall Street Journal (Peter Lattman, Jenny Strasburg and Deborah
Solomon): "Stocks surged world-wide after the White House formally unveiled
its plan to clean banks' balance sheets, with an emphasis on luring private
investors to buy up to $1 trillion in toxic assets that are choking the flow
of credit. The Dow Jones Industrial Average soared 6.8%, or 497.48 points,
to 7775.86, in its biggest gain since late October. Bank stocks rose sharply
on hopes the plan will rid them of much of the soured debt and securities weighing
on their balance sheets. Citigroup Inc. shares were up about 20% and Bank of
America Corp. shares rose 26%."

March 25 - Bloomberg (Laura Cochrane): "Emerging-market borrowing costs are
'unrealistic' and will increase to near record highs this year as governments
and companies seek to make $760 billion of debt repayments and global defaults
rise, according to ING Groep NV. The extra yield investors demand to own emerging-market
sovereign and quasi-sovereign bonds, which dropped to a four- month low of
6.69% today, may climb to above 10%, said David Spegel, global head of emerging-market
strategy at ING..."

Currency Watch:

March 23 - MarketWatch (Polya Lesova): "Federal Reserve Board Chairman Ben
Bernanke and Treasury Secretary Timothy Geithner flatly rejected on Tuesday
a call from a senior Chinese official to drop the dollar as the world's key
reserve currency. Zhou Xiaochuan, head of the People's Bank of China, proposed
the creation a new international reserve currency in an essay published on
the central bank's Web site... The proposal is the latest sign of tension between
China and the U.S. over important global economic matters."

Another interesting week for the currencies. The dollar index rallied 1.5%
this week to 85.11 (up 4.7% y-t-d). For the week on the upside, the South Korea
won increased 4.75%, the New Zealand dollar 2.2%, and the Australian dollar
1.1%. On the downside, the Norwegian krone declined 3.8%, the Euro 2.1%, the
Danish krone 2.1%, the Japanese yen 2.0%, the Swiss franc 1.4%, the Mexican
peso 1.2%, and the British pound 1.0%.

March 27 - Bloomberg (Li Yanping and Kevin Hamlin): "China is scolding the
world before the Group of 20 meeting next week, telling the largest countries
to spend more on stimulus and fix their financial supervision. Central bank
Governor Zhou Xiaochuan yesterday lambasted governments that failed to emulate
China's "decisive" action to spur economic growth. Earlier this week he suggested
creating a new international reserve currency to rival the dollar."

March 24 - China Knowledge: "Daimler AG's Mercedes-Benz Friday said its monthly
vehicle sales grew 21% year on year to hit 2,800 units on the Chinese mainland
in February, 3.4% higher than the average growth rate of the overall sedan
segment, the China Daily reported."

March 24 - Bloomberg (Jiang Jianguo): "China barred the nation's state-owned
companies from taking part in speculative hedging, the Chinanews news service
reported..."

March 27 - Bloomberg (Li Yanping and Nipa Piboontanasawat): "Chinese industrial
companies' profits dropped for the first time on record as the global recession
cut demand for exports from the world's third-largest economy. Net income sank
37.3% in the first two months of 2009 from a year earlier to 219.1 billion
yuan ($32 billion)..."

Japan Watch:

March 25 - Bloomberg (Saburo Funabiki and Norihiko Kosaka): "Japan's companies
are paying the least to borrow since 2006 after the central bank started buying
commercial paper, signaling an end to the credit squeeze that helped push the
world's second-biggest economy into recession."

March 24 - Bloomberg (Naoko Fujimura): "Japan's vehicle sales may fall to
the lowest in 32 years as the country's deepening recession discourages customers
from visiting showrooms. Industrywide sales... may fall 8% to 4.3 million vehicles...
the Japan Automobile Manufacturers Association said..."

Asia Reflation Watch:

March 24 - Bloomberg (Seyoon Kim): "South Korea plans to spend a record 17.7
trillion won ($13 billion) on cash handouts, cheap loans, infrastructure and
job training to revive an economy on the brink of its first recession in more
than a decade. The stimulus will boost economic growth by 1.5 percentage points
and help create 552,000 new jobs, the finance ministry said..."

Central Banker Watch:

March 26 - Bloomberg (Anchalee Worrachate): "Bank of England Governor Mervyn
King says Gordon Brown should be 'cautious' on public spending while the official
in charge of U.K. bond sales says the central bank is undermining demand for
government debt. For the first time in almost seven years, the U.K. couldn't
find enough buyers for one of its debt sales when it offered 1.75 billion pounds
($2.55 billion) of bonds... Robert Stheeman, head of the U.K.'s Debt Management
Office, which runs the bond auctions, says it wasn't able to attract enough
bids partly because of the Bank of England's efforts to lower yields through
debt purchases."

Fiscal Watch:

March 25 - Associated Press (Randolph E. Schmid): "The post office will run
out of money this year unless it gets help, Postmaster General John Potter
told Congress... 'We are facing losses of historic proportion. Our situation
is critical,' Potter told a House panel. The agency lost $2.8 billion last
year and is looking at much larger losses this year. Reducing mail delivery
from six days to five days a week could save $3.5 billion annually, Potter
said."

GSE Watch:

March 27 - Washington Post (Zachary A. Goldfarb): "Half a year after the government
seized Freddie Mac, confusion about its role is stoking tensions between the
company and its regulator, including a dispute this month over how much the
mortgage giant should reveal to private investors about its financial troubles.
Federal officials who took over Freddie Mac stopped short of nationalizing
the company, leaving it partly in private hands. This means Freddie still has
to answer to investors and file financial disclosures. But when Freddie Mac's
executives concluded a few weeks ago that they had to disclose that the government's
management of the... company was undermining its profitability and would cost
it tens of billions of dollars, the firm's regulator urged it not to do so,
according to several sources... The clash grew so severe that they threatened
to go to the Securities and Exchange Commission... The company's regulator
backed down, the sources said"

March 25 - Bloomberg (Romaine Bostick): "Freddie Mac, the mortgage-finance
company under federal control, said its portfolio of home-loan assets rose
at an annualized rate of 35% last month. The holdings climbed by $23.1 billion
in February to $822 billion as regulators leaned on the company to help modify
or refinance more loans for struggling borrowers..."

March 24 - Wall Street Journal (John W. Miller): "The World Trade Organization
issued the most pessimistic report on global trade in its 62-year history,
forecasting a drop of 9% or more in 2009. Monday's prediction is worse than
previous estimates by the WTO, the World Bank and independent economists..."

March 27 - Bloomberg (Jurjen van de Pol): "European industrial orders dropped
the most on record in January as the global recession forced companies to cut
production, reducing demand for equipment and machinery. Industrial orders
in the euro area fell 34% from the year-earlier month, when they declined 24%..."

March 25 - Bloomberg (Simone Meier): "German business confidence fell to the
lowest level in more than 26 years in March, adding to signs that the recession
is deepening."

Bursting Bubble Economy Watch:

March 26 - Bloomberg (Bob Willis): "The number of people collecting U.S. jobless
benefits rose to a record 5.56 million, indicating more Americans are spending
longer periods out of work. Initial claims topped 600,000 for an eighth straight
time."

March 27 - Bloomberg (Lee J. Miller): "Coupon clipping is back in vogue, increasingly
driven by the Internet, as recession prompts consumers to turn in price-off
tokens, according to retailers including McCormick & Co., the world's biggest
spice seller, and Kroger Co., the largest U.S. supermarket chain. 'Redemptions
in the U.S. are up 20% versus last year,' McCormick Chief Executive Officer
Alan Wilson said."

California Watch:

March 25 - Los Angeles Times: "Ravenous investor demand allowed California
today to boost the size of its infrastructure bond sale to $6.54 billion from
a planned $4 billion, and to close out the deal a day early. The offering,
the state's first sale of longer-term bonds since June, didn't come cheap for
taxpayers: The longest-term bond, maturing in 2038, will pay investors an annualized
tax-free yield of 6.1%. By contrast, California paid a yield of 5.3% on bonds
of that maturity in the June sale. Still, the deal allowed Treasurer Bill Lockyer
to make a dent in the state's backlog of voter-approved bonds to be sold..."

March 25 - California Association of Realtors: "Home sales increased 83% in
February in California compared with the same period a year ago, while the
median price of an existing home declined 40.8%. The median price... was $247,590,
a 40.8% decrease... The February 2009 median price fell 2.3% compared with
January's... C.A.R.'s Unsold Inventory Index... in February 2009 was 6.5 months,
compared with 15.3 months for the same period a year ago."

March 25 - Wall Street Journal (By Peter Sanders): "As Don Bransford prepares
for his spring planting season, he is debating which is worth more: the rice
he grows on his 700-acre farm north of Sacramento, or the water he uses to
cultivate it. After three years of drought in California, water is now a potential
cash crop... Water -- or the lack of it -- has been costing the state dearly.
According to Richard Howitt, a professor at the University of California, Davis,
the drought and resulting water restrictions could cost as much as $1.4 billion
in lost income and about 53,000 lost jobs, mostly in the agriculture sector."

New York Watch:

March 26 - Bloomberg (Henry Goldman): "New York City experienced a record
month-to-month increase in its unemployment rate, climbing to 8.1% in February
from 6.9% in January..."

Muni Watch:

March 27 - Bloomberg (Jeremy R. Cooke): "U.S. state and local borrowers sold
about $12 billion of bonds in the biggest week for new issues since December
2006, as strong reception for California's record deal helped to cap yield
increases in the broader market."

Speculator Watch:

March 24 - Bloomberg (Bei Hu): "The global hedge fund industry may shrink
by 11% this year as funds liquidate and investor withdrawals persist, a Deutsche
Bank AG survey said. Industry assets may fall to $1.33 trillion by December..."

March 23 - Financial Times (James Mackintosh): "Hedge fund investors believe
the industry will see even bigger withdrawals this year than last, when record
levels of cash were pulled from the sector. A survey of investors by Deutsche
Bank found a third expect more than $200bn to be withdrawn, after a net $155bn
was taken out last year, according to calculations by Chicago consultancy Hedge
Fund Research."

March 27 - Bloomberg (Michael B. Marois): "The California Public Employees'
Retirement System, the largest U.S. state public pension fund, said it wants
to renegotiate the fees it pays hedge funds. Calpers, as the fund is known,
said hedge fund payments should be based on long-term rather than short-term
performance."

Revisiting the Global Savings Glut Thesis:

"The extraordinary risk-management discipline that developed out of the writings
of the University of Chicago's Harry Markowitz in the 1950s produced insights
that won several Nobel prizes in economics. It was widely embraced not only
by academia but also by a large majority of financial professionals and global
regulators. But in August 2007, the risk-management structure cracked. All
the sophisticated mathematics and computer wizardry essentially rested on one
central premise: that the enlightened self-interest of owners and managers
of financial institutions would lead them to maintain a sufficient buffer against
insolvency by actively monitoring their firms' capital and risk positions." Alan
Greenspan, March 27, 2009, Financial Times

Alan Greenspan remains the master of cleverly obfuscating key facets of some
of the most critical analysis of our time. The fact of the matter is that "the
sophisticated mathematics and computer wizardry" fundamental to contemopary
derivatives and risk management essentially rested on one central premise:
that the Federal Reserve (and, more generally speaking, global policymakers)
was there to backstop marketplace liquidity in the event of market tumult.
More specific to the mushrooming derivatives marketplace, participants came
to believe that the Fed had essentially guaranteed liquid and continuous markets.
And the Bigger the Credit Bubble inflated the greater the belief that it was
Too Big for the Fed To ever let Fail. It was clearly in the "enlightened self-interest" of
operators of "Wall Street finance" and throughout the system to fully exploit
this market pervision. With unimaginable wealth there for the taking, along
with the perception of a Federal Reserve "backstop," why would anyone have
kidded themselves that there was incentive to ensure individual institutions "maintained
a sufficient buffer against insolvency"? By the end of boom cycle, market incentives
had been completely debauched.

The Greespan Fed pegged the cost of short-term finance (fixing an artificially
low cost for speculative borrowings), while repeatedly intervening to avert
financial crisis ("coins in the fusebox"). There is absolutely no way that
total system Credit would have doubled this decade to almost $53 TN had the
Activist Federal Reserve not so aggressively and repeatedly intervened in the
markets. To be sure, the explosion of derivatives and attendant speculative
leveraging was central to the historic dimensions of the Credit Bubble.

Mr. Greenspan today made it through yet another article without using the
word "Credit." "Free-market capitalism has emerged from the battle of ideas
as the most effective means to maximise material wellbeing, but it has also
been periodically derailed by asset-price bubbles..." "Financial crises are
defined by a sharp discontinuity of asset prices. But that requires that the
crisis be largely unanticipated by market participants." "Once a bubble emerges
out of an exceptionally positive economic environment, an inbred propensity
of human nature fosters speculative fever that builds on itself..." He might
cannily dodge the topic, but Mr. Greenspan recognizes all too well that Credit
has and always will be central to the functioning - and misfunctions - of free-market
Capitalistic systems.

With respect to the past, present and future analyses, I believe the spotlight
should be taken off asset prices. Such focus is misplaced and greatly muddies
key issues. Much superior is an analytical framework that examines the underlying
Credit excesses that fuel asset inflation and myriad other distortions. Ensure
us a stable Credit system and the risk of runaway asset booms and busts disappears.
Today's financial crisis - and financial crises generally - are defined by
a sharp discontinuity of the flow of Credit. Major fluctuations in asset markets
- on the upside and downside - are typically driven by changes in the quantity
and directional flow of Credit. Central bankers should focus on stable finance
and resist the powerful tempation to monkey with asset prices and markets.
As common sense as this is, today's flawed conventional thinkng leaves most
oblivious and poised for Mistakes to Beget Greater Mistakes.

When it comes to flawed conventional thinking, few things get my blood pressure
rising more than the "global savings glut" thesis. Two weeks ago from Alan
Greenspan, via The Wall Street Journal:

"...The presumptive cause of the world-wide decline in long-term rates was
the tectonic shift in the early 1990s by much of the developing world from
heavy emphasis on central planning to increasingly dynamic, export-led market
competition. The result was a surge in growth in China and a large number of
other emerging market economies that led to an excess of global intended savings
relative to intended capital investment. That ex ante excess of savings propelled
global long-term interest rates progressively lower between early 2000 and
2005. That decline in long-term interest rates across a wide spectrum of countries
statistically explains, and is the most likely major cause of, real-estate
capitalization rates that declined and converged across the globe, resulting
in the global housing price bubble. By 2006, long-term interest rates and the
home mortgage rates driven by them, for all developed and the main developing
economies, had declined to single digits -- I believe for the first time ever.
I would have thought that the weight of such evidence would lead to wide support
for this as a global explanation of the current crisis."

It is difficult these days for me to accept that Greenspan, Bernanke and others
are sticking to this misplaced view that a glut of global saving was predominantly
responsible for the proliferation of U.S. and global Bubbles. The failure of
our policymakers to understand and accept responsibility for the Bubble must
not sit well internationally. Long-time readers might recall that I pilloried
this analysis from day one. The issue was never some glut of "savings" but
a historic glut of Credit and the resulting "global pool of speculative finance." In
today's post-Bubble period, it should be indisputable that the acute financial
and economic fragility exposed around the globe was the result of egregious
lending, financial leveraging, and speculation. True savings would have worked
to lessen fragility - instead of being the root cause of it.

Unfortunately, there is somewhat of a chicken and egg issue that bedevils
the debate. Greenspan and Bernanke have posited that China and others saved
too much. This dynamic is said to have stoked excess demand for U.S. financial
assets, pushing U.S. and global interest rates to artifically low levels. This,
they expound, was the root cause of asset Bubbles at home and abroad. I take
a quite opposing view, believing it is unequivocal that U.S. Credit excess
and resulting over-consumption, trade deficits, and massive current account
deficits were the underlying source of so-called global "savings." Again, if
it had been "savings" driving the process, underlying system dynamics wouldn't
have been so highly unstable and the end result would not have been unprecedented
systemic fragility. Instead, the seemingly endless liquidity - so distorting
of markets and economies round the world - was in large part created through
the process of unfettered speculative leveraging of securities and real estate.

As is so often the case, we can look directly to the Fed's Z.1 "flow of funds" report
for Credit Bubble clarification. Total (non-financial and financial) system
Credit expanded $1.735 TN in 2000. As one would expect from aggessive monetary
easing, total Credit growth accelerated to $2.016 TN in 2001, then to $2.385
TN in 2002, $2.786 TN in 2003, $3.126 TN in 2004, $3.553 TN in 2005, $4.025
TN in 2006 and finally to $4.395 TN in 2007. Recall that the Greenspan Fed
had cut rates to an unprecedented 1.0% by mid-2003 (in the face of double-digit
mortgage Credit growth and the rapid expansion of securitizations, hedge funds,
and derivatives), where they remained until mid-2004. Fed funds didn't rise
above 2% until December of 2004. Mr. Greenspan refers to Fed "tightening" in
2004, but Credit and financial conditions remained incredibly loose until the
2007 erruption of the Credit crisis.

It is worth noting that our Current Account Deficit averaged about $120bn
annually during the nineties. By 2003, it had surged more than four-fold to
an unprecedented $523bn. Following the path of underlying Credit growth (and
attendant home price inflation and consumption!), the Current Account Deficit
inflated to $625bn in 2004, $729bn in 2005, $788bn in 2006, and $731bn in 2007.
And examining the "Rest of World" (ROW) page from the Z.1 report, we see that
ROW expanded U.S. financial asset holdings by $1.400 TN in 2004, $1.076 TN
in 2005, $1.831 TN in 2006 and $1.686 TN in 2007. It is worth noting that ROW "net
acquisition of financial assets" averaged $370bn during the nineties, or less
than a quarter the level from the fateful years 2006 and 2007.

The Z.1 details, on the one hand, the unprecedented underlying U.S. Credit
growth behind our massive Current Account Deficits. ROW data, in particular,
diagnoses the flooding of dollar balances to the rest of the world - and the "recycling" of
these flows back to dollar instruments. This unmatched flow of finance devalued
our currency, and in the process inflated commodities, foreign debt, equity
and assets markets, and global Credit systems more generally. In somewhat simplistic
terms, ultra-loose monetary conditions fed U.S. Credit excess, excessive financial
leveraging and speculating, asset inflation, over-consumption, and enormous
Current Account Deficits. And this unrelenting flow of dollar balances to the
world inflated the value of many things priced in devalued dollars, thus exacerbating
both global Credit and speculative excess. The path from the U.S. Credit Bubble
to the Global Credit Bubble is even more evident in hindsight.

Back in November of 2007 Mr. Greenspan made a particularly outrageous statement. "So
long as the dollar weakness does not create inflation, which is a major concern
around the globe for everyone who watches the exchange rate, then I think it's
a market phenomenon, which aside from those who travel the world, has no real
fundamental economic consequences."

Similar to more recent comments on the "global savings glut," I can imagine
such remarks really rankle our largest creditor, the Chinese. As we know, the
Chinese were the major accumulator of U.S. financial assets during the Bubble
years. They are these days sitting on an unfathomable $2.0 TN of foreign currency
reserves and are increasingly outspoken when it comes to their concerns for
the safety of their dollar holdings. There is obvious reason for the Chinese
to question the reasonableness of continuing to trade goods for ever greater
quantities of U.S. financial claims.

Interestingly, Chinese policymakers are today comfortable making pointed comments.
Policymakers around the world are likely in agreement on a key point but only
the Chinese are willing to state it publicly: the chiefly dollar-based global
monetary "system" is dysfunctional and unsustainable. Mr. Greenpan may have
actually convinced himself that dollar weakness has little relevance outside
of inflation. And the inflationists may somehow believe that a massive inflation
of government finance provides the solution to today's "deflationary" backdrop.
Yet to much of the rest of the world - especially our legions of creditors
- this must appear too close to lunacy. How can the dollar remain a respected
store of value? Expect increasingly vocal calls for global monetary reform.

"The desirable goal of reforming the international monetary system, therefore,
is to create an international reserve currency that is disconnected from individual
nations and is able to remain stable in the long run, thus removing the inherent
deficiencies caused by using credit-based national currencies.' Zhou Xiaochuan,
head of the People's Bank of China, March 23, 2009